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Safety Stock

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Safety Stock

One problem with manufacturing is that the manufacture and/or delivery of a major product can be held up simply because a minor component is not available. This results in not being able to Invoice the main (and possibly multi-thousand $$$) product....all because a key component costing a few $$$ is not available; hence the need for Safety Stock.

Safety Stock represents an amount - usually in addition to minimum stock – that is applied to all or key components.

There are two calculations that could be used to evaluate Safety Stock

  • Fixed Safety Stock based on an average historical daily usage
  • Variable Safety Stock based on future demand.

1. Fixed Safety Stock:  A simple calculation based on having (for example) 2 days-worth of stock on hand at all times. This is evaluated from

  • Average Daily Usage - based on all Issues of the Item over the past 12 months
  • Days Cover – The number of Days-worth of Safety Stock

The Safety Stock would be evaluated as

Average Daily Usage * Days Cover

2. Variable Safety Stock

This is a slightly more complex calculation that uses an average daily demand over a defined period and applying that average as the Safety Stock for a specified number of days. For example: Let us specify three parameters

  • Days Cover
  • Average Days Horizon
  • Period Length

Starting with the system date, and using the Period Length, determine the period start and end date.

From the start date of this Period add up all the Demands for the length of the ‘Average Days Horizon’ and divide this by the ‘Average Days Horizon’ to arrive at a ‘Daily Demand’. Multiply this Demand by the ‘Days Cover’ to arrive at a ‘Safety Stock’.

This Safety Stock will be in force for the length of this Period.

Using figures to demonstrate this let us assume the following

  • Days Cover – Let us have 2 days-worth of Safety Stock
  • Average Days Horizon – let us look at the demand for the next 4 weeks (I.e. 28 days)
  • Period Length – Let us assume the Period is for 7 days

- If Demand over the Average Days Horizon is (say) 140 then the Daily Demand would be 5
- For a 'Days Cover' of 2 this would result in a Safety Stock of 10
- This Safety Stock would apply to all days within the Period

This method therefore requires the Safety Stock to be re-evaluated on a regular basis based around the Period end. It would normally be run as a pre-requisite to Ostendo's Replenishment routine being run.

If you wish to carry out this function in Ostendo then go to Help>Tutorial and select Safety Stock evaluation. That tutorial will look at the Fixed Safety Stock option and allow you to update the Item Master record. The Variable Safety Stock option is normally used when running Ostendo's Replenishment routine.

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Ostendo® adds advanced inventory, job costing, manufacturing, service and distribution to your accounting system.

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